The recent release of US inflation data, historically a pivotal market moment, passed with a collective shrug from investors last Wednesday night. Despite inflation’s global significance and its bearing on future US interest rates, the market remained largely unmoved. Federal Reserve Chairman Kevin Warsh observed headline inflation ease modestly from 3.5 per cent to 3.4 per cent, in line with expectations. Core inflation registered 2.5 per cent. While this offered a slight sigh of relief, easing pressure on the Fed for a September rate hike, the S&P 500 remained flat, and the 10-year US Treasury yield actually increased.
This market indifference signals investors are less focused on backward-looking data, especially with renewed geopolitical tensions pushing oil prices toward US$90 a barrel, suggesting future inflation could rebound. Broader long-term pressures, including rising US government debt and significant AI infrastructure spending, also weigh on sentiment. Crucially, the most potent force currently propelling US markets is the extraordinary surge in corporate profits. Wall Street’s June quarter profit season saw S&P 500 earnings per share surge by 46.7 per cent, building on a 19 per cent climb in the March quarter. Even excluding specific investment gains, earnings still rose an impressive 25.7 per cent.
Veteran market strategist Ed Yardeni deemed this earnings picture unprecedented, with consensus forecasting calendar 2026 earnings growth at a staggering 32.6 per cent. This robust profitability drives the renewed ‘melt-up’ on US markets, seeing the S&P 500 add almost 6 per cent in recent weeks, with Yardeni raising his year-end target to 8400 points. While this growth is largely fuelled by massive AI spending, Torsten Slok, chief economist at Apollo Global Management, questions its sustainability. He notes AI chipmakers enjoy substantial margins while AI model developers operate at a significant loss, implying investors, not paying customers, are funding these upstream profits. This critical question of AI ROI now overshadows future interest rate debates.
